The Buffett Tax Explained Using A Hippopotamus And An Oxpecker

When Warren Buffett claimed that a lot of secretaries pay higher tax rates than the super-wealthy, JPMorgan's Michael Cembalest wanted to take a closer look. As shown in the first chart, Buffett’s assertion is only the case in a minority of situations (like his own).

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The vast majority of taxpayers with adjusted gross income over $1 million and over $5 million have effective tax rates in the 22%-35% range, considerably higher than the range of tax rates paid by those with AGI below $100k. As a result, Cembalest notes he was not expecting to see large revenue estimates from an analysis of the fiscal impact of the proposals in the Fair-Share Act of 2012, since if the first chart is correct, there are not that many people that would be impacted by a minimum 30% effective tax rate. Now let’s look at some numbers.

The Congressional Joint Committee on Taxation and the Brookings Tax Policy Center analyzed the proposal, under the assumption that the Bush tax cuts sunset for the top two brackets. If that’s the case, the incremental revenue raised by the Fair-Share Tax Act is around $8 billion per year.

This is real money and may be sound public policy, but in the context of a $1 trillion budget deficit expected for FY2013, it’s a rounding error.

To convey this zoologically, we show two animals whose volume is proportionally the same (125 to 1): a hippopotamus, and its symbiotic companion, the yellow-billed oxpecker.

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I would like to think that elected officials and political commentators would avoid grandstanding and not mislead anyone on the fiscal impact of their proposals, but right now, there are some people who need help distinguishing between birds and hippos.